What is the Prudential Regulation Authority (PRA)?

The Prudential Regulation Authority (PRA) is one of two key regulatory bodies presiding over the financial services industry in the UK. It is responsible for the regulation of more than 1,500 banks, credit unions, building societies, insurance companies and investment firms. 

Background to the PRA

The PRA is likely well-known by those who follow the financial services sector. 

In the aftermath of the 2007/08 financial crisis, the Bank of England (BoE) decided that more needed to be done in terms of regulation within the financial services industry. 

Operating as one of two regulatory arms of the BoE, the PRA’s main function is to create policies designed to promote the safety and financial stability of the firms it regulates – to try to prevent the mistakes that led to the financial crisis from happening again.

What do you need to know about the PRA?

Now that we have defined the PRA, we can take a closer look at its history and how it works. 

Founded in 2013 following the abolition of the Financial Services Authority, the PRA was formed alongside the Financial Conduct Authority (FCA) to act as the regulating bodies of the financial services industry. 

Whereas the FCA’s main objective is to ensure protection for consumers, the PRA aims to ensure stability within the financial markets.

The PRA uses a multi-faceted approach to achieve these aims:

• Judgement-based. Due to the complexity of the financial services industry, attempting to impose regulation on a one-size-fits-all basis would be futile. Instead, the PRA assesses each institution individually to identify potential issues, relying on judgement to determine whether or not a firm poses any risk to financial stability.

• Forward-looking. By implementing a forward-looking approach, the PRA attempts to identify vulnerabilities before they have a significant impact. This is achieved through the use of stress testing – a process in which computer simulations attempt to ascertain a particular outcome based upon several variables. For example, the PRA might look to assess how an institution’s investment portfolio would weather a sudden downturn in the market or a black swan event, such as the COVID-19 pandemic.

• Focused on key risks. The PRA focuses its efforts on the firms and risks deemed to be the most significant threat to the stability of the UK financial system. The level of supervision from the PRA rises in line with the perceived risk level for particular firms.